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Uniformity of Law: Cases From Other Jurisdictions Can Make YOUR Case

Make YOUR Case
Although it is clear from the name itself—i.e.—the Uniform Commercial Code, the drafters of the Code explicitly stated the policy of uniformity in Section 1-103(a)(3):

(a)  [The Uniform Commercial Code] must be liberally construed and applied to promote its underlying purposes and policies, which are:

(1)  to simplify, clarify and modernize the law governing commercial transactions;

(2)  to permit the continued expansion of commercial practices through custom, usage, and agreement of the parties; and

(3)  to make uniform the law among the various jurisdictions.

Traditionally, courts are reluctant and often unwilling to consider the case law from other jurisdictions.  However, in furtherance of the uniformity of law policy of the Uniform Commercial Code, courts regularly look to the law of other jurisdictions in determining disputes before the court.  Attorneys who understand and actively employ this policy, have an arsenal of cases from all jurisdictions which can be used to support a theory or argument presented to the court.  This is obviously a great advantage over the attorney who is singularly focused on the law of his or her jurisdiction.

In the case of In re Hispanic American Television Co., Inc. 113 B.R. 453 (Bkrtcy.) N.D. Ill. 1990) 11 UCC Rep Serv 2d),  the legal issue before the court was the question of whether or not the contract between Motorweek Productions and Hispanic American Television Co., designated as a lease, was in fact a lease or a security agreement.  If the contract was in fact a true lease, Motorweek, as lessor, would be entitled to repossess the equipment as provided for in the lease.  If on the other hand, the contract was deemed to be a security agreement, the equipment would become property of the Debtor’s estate.  Under the purported lease, Hispanic American Television Co. was required to make monthly payments of $55,624.97 over a five year term.  At the time of default, Hispanic American Television Co. owed Motorweek $525,000.

The controlling law at the time of the case was Section 1-201(37), which contained the definition of “Security interest” and addressed the specific question of whether or not a lease is in fact a lease or a lease intended as security.  The latter question is now specifically addressed in Section 1-203, and the definition of “Security interest” is now contained in Section 1-201(35).

The case is particularly interesting for two reasons.  First, although the Court made a determination that the parties to the contract did in fact intend the contract to be a true lease; the Court nevertheless found that the contract between the parties was in fact a security agreement. Of course, the law determines the answer to the legal question of whether a transaction is a true lease or a security agreement, but the determination that the parties did in fact intend a lease is significant.  The characterization of the transaction however, must also be viewed outside the context of the parties to the agreement.  In addition to the controlling law, the agreement must be viewed in the context of the interests of other creditors of the Debtor who have a very high stake in the determination of the nature of the agreement.  As noted earlier, if the contract is a true lease, Motorweek can retake its equipment; if not, the equipment becomes part of the Debtor’s estate and hence available to other creditors.

The second reason that the case was particularly interesting is that the contract contained a choice of law provision which stated that the law of New York was to govern the transaction.  This certainly would include the case law of New York. Notwithstanding this provision however, the court stated:

Section 1-201(37) of the U.C.C. is identical in New York and Illinois.  The case law from both states is relevant on the issue of distinguishing a “true lease” from a security agreement.  In Re Hispanic Television Co., Inc. at 456

The court went on to state:

Further, given the uniformity purpose of the UCC, decisions from other states which have adopted its standard provisions are also relevant.  Id at 456-457

There are many cases which support these statements from In Re Hispanic Television Co., Inc..  They present a great arsenal for the attorney who utilizes their potential impact on his or her case.

Robert LeVine, Professor, Author the book The Uniform Commercial Code Made Easy

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by learntheucc on February 18, 2013  •  Permalink
Posted in Article 2 - Sales transactions, Article 9 - Secured Transactions, Learn the UCC, Twitter
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Posted by learntheucc on February 18, 2013

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Article 1: An Advocate’s and Drafter’s Best Friend

Article 1 of the Uniform Commercial Code is the most overlooked and critical Article of the Uniform Commercial Code.  No Article provides as much creative freedom in terms of drafting contracts and shaping litigation as Article 1. Of particular significance is the fact that Article 1 applies to all transactions under the Uniform Commercial Code, regardless of the substantive Articles which apply in a given situation.  This follows by reason of section 1-102 which states as follows:

This article applies to a transaction to the extent that it is governed by another article of the Uniform Commercial Code.

We have already discussed the very important definitions of ‘contract’ and ‘agreement’, defined in Article 1 in sections 1-201(b)(12) and 1-201(b)(3) respectively.  Likewise as to the very important connected definitions and application of ‘course of performance’, ‘course of dealing’, and ‘usage of trade’ under sections 1-303(a)(b)(c).

The next series of blogs are designed to guide the reader through a detailed analysis of Article 1.  In addition to discussing the meaning of the text, examples of the application of various sections will be undertaken.  Cases will also be used to illustrate certain concepts.

The starting point for analysis is the introductory language of section 1-103(a):

The Uniform Commercial Code must be liberally construed and applied to promote its underlying purposes and policies…. [Emphasis added]

The importance of this language cannot be overestimated.  At the outset, the drafters are giving two very important mandates to the courts; one pertaining to the construction and application of the Uniform Commercial Code; the other pertaining to the utilization of policies upon which the Uniform Commercial Code was drafted.  The court is directed, in the first instance, to ‘liberally construe and apply’ the Uniform Commercial Code; in the second instance the court is directed to do so in a manner which ‘promotes the underlying purposes and policies’ of the Uniform Commercial Code.

The advocate, within the structure of this mandate, has extraordinary ability to shape litigation and guide the court to reach the desired result.  The essence of the strategy is to line up the interpretation of relevant statutory provisions and the facts of the case with enumerated policies which support the interpretation of the position being advocated.  This positioning provides enormous flexibility and creativity for advocates and drafters alike.  The manner for utilizing these concepts will be discussed in upcoming blogs.

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by learntheucc on December 10, 2011  •  Permalink
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Posted by learntheucc on December 10, 2011

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The Uniform Commercial Code: The Comprehensive Approach

 As noted in Blog #9 (The Second Element of Contract: Application of the Uniform Commercial Code to the Agreement), once the parties ‘agreement’ has been delineated, the next element of the definition of ‘contract’ comes into play: application of the Uniform Commercial Code to the agreement which has been created.  Once an agreement for sale has been determined to be enforceable under Section 2-201, the next step involves the application of the Uniform Commercial Code to the totality of that agreement.

It is clear that Article 2 will apply since we are hypothesizing a sales agreement.  Article 1 will also apply since that Article applies to all transactions under the Uniform Commercial Code.  In addition, several other Articles will be activated by the typical commercial sales transaction.  First, there will generally be some shipment of goods from the seller to the buyer which will activate Article 7, documents of title.  For the shipping portion of the transaction, the primary document will be a ‘bill of lading’ as defined in Section 1-201(b)(6); if goods are stored either before or after shipment, a warehouse receipt will likely be issued which is defined in Section 1-201(b)(42).  The rights, duties and liability regarding these documents is covered under Article 7.  Once again, it is worth noting that the actual definition of the documents themselves is found in Article 1.

There will also be a payment mechanism of some type: a check or promissory note which activate Article 3; a wire transfer which activates Article 4A; or a letter of credit which activates Article 5.  If a documentary draft is involved, Section 4-104(a)(6), Article 4 will be activated.  Finally, if the transaction is financed, Article 9 will be activated as well.

The comprehensive approach to Uniform Commercial related problems, incorporates the reality that many sections of the UCC are activated in most commercial transactions.  While Article 2 may supply the key sections involved in a given Sales transaction, there are many sections in the other Articles which can create leverage and opportunities for someone drafting documents or someone involved in litigation. I have always been of the opinion that the comprehensive approach to Uniform Commercial Code matters is the best way to visualize and deal with UCC matters.

It is important to understand the reality of the comprehensive approach before undertaking the application of the substantive provisions of the UCC to the parties agreement.  The next Blog will begin the application of Article 1 to Sales transactions, in the litigation and drafting contexts.

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by learntheucc on December 4, 2011  •  Permalink
Posted in Article 1 - General Provisions, Article 2 - Sales transactions, Article 3 - Negotiable Instruments, Article 4 - Bank Deposits, Article 5 - Letters of Credit, Article 7 - Documents of Title, Article 9 - Secured Transactions, Learn the UCC, Twitter
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Posted by learntheucc on December 4, 2011

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The Second Element of Contract: Application of the Uniform Commercial Code to the Agreement

At this point in our mission to “Learn the UCC”, we have discussed the first element in determining what a contract is under the Uniform Commercial Code: namely, the ‘agreement’ of the parties as determined by the application of the criteria stated in Section 1-203(b)(3).  As discussed in Blogs 4 – “What IS a Contract”  & 5 – “Course of Performance: Impact on Contract”, there are two more elements which must be addressed before one can determine what the contract is in reality, or if in fact there is a ‘legal obligation between the parties’.  These elements include the application of relevant UCC provisions to the agreement between the parties, and the application of supplemental general principles of law which are also applicable to the agreement.  It is only upon the application of these criteria to the parties’ agreement, that the ‘legal obligation’ among the parties can be determined.

The laws which apply to a sales contract under the Uniform Commercial Code are those laws contained in Article 2, Sales, and the laws contained in Article 1, General Provisions.  It is extremely important to remember at all times that Article 1 applies to the whole Uniform Commercial Code per section 1-102; hence, regardless of the substantive article which applies to a given transaction, it will always be supplemented by the provisions of Article 1.  This is often overlooked, and in such a situation, a huge body of law, with enormous implications is not activated.

As we have already seen, the definition of ‘contract’ is found in Article 1 as are the terms comprising the definition of agreement.  Further, the application of these concepts as envisioned by Sections 1-201(b)(3) and 1-303, can have an enormous impact on the ultimate meaning of the parties agreement, and hence, their contract. Article 1 will be discussed in detail in upcoming Blogs.

Once the parties ‘agreement’ is determined, I believe that most logical next step is to determine whether or not the ‘agreement’ is enforceable under the Statute of Frauds.  While the totality of Article 1 applies to the ‘agreement’, it is irrelevant if the agreement itself has no legal import due to the Statute of Frauds.  The basic rule of Section 2-201(1), and the reply doctrine of Section 2-201(2), were discussed in Blog # 3 – “Monopoly and the UCC”.  If there is a written contract signed by the party against whom enforcement is sought, or the requisite confirmatory memoranda under Section 2-201(2), the contract is enforceable.  If however, neither of these criteria is met, there are still three possible exceptions to the writing requirement of Section 2-201(1).

Two of these exceptions are quite easy.  Under Section 2-201(3)(b), the contract is enforceable “if the party against whom enforcement is sought admits in his pleading, testimony or otherwise in court that a contract for sale was made”  Obviously, in such a situation, the contract has been admitted, and hence should be enforced.  Another situation which is very straightforward is the exception to the basic Statute of Frauds rule “with respect to goods for which payment has been made and accepted or which have been received and accepted”.  Payment for goods or acceptance of goods is an unmistakable statement that the contract exists.

The final exception is stated under Section 2-201(3)(a) which states as follows:

A contract which does not satisfy the requirements of subsection (1) but which is valid in other respects is enforceable

(a) if the goods are to be specially manufactured for the buyer and are not suitable to sell to others in the ordinary course of the seller’s business and the seller, before notice of repudiation is received and under circumstances which reasonably indicate that the goods are for the buyer, has made either a substantial beginning of their manufacture or commitments for their procurement.

There are thus four questions which must be answered in order to determine if Section 2-201(3)(a) applies in a given case:

(a)    Are the goods to be specifically manufactured for the alleged buyer?

(b)    Are the goods in question suitable for sale to others in the ordinary course of the seller’s business?

(c)   Did the seller make the “substantial beginning” of the manufacture of the goods in question or “commitments for their [its] procurement”?

(d)   Was the foregoing done before notice of repudiation was received, and under circumstances which reasonably indicate that the goods are for the buyer?

In order for the contract to be enforceable under the Statute of Frauds per Section 2-201(3)(a), the questions must be answered as follows:

(a)   yes; (b) no; (c) yes; (d) yes.

The policy behind Section 2-201(3)(a) is predicated upon the commercial reality that a seller is unlikely to undertake the manufacture of a product which cannot be sold in the seller’s ordinary course of business for no reason.  Such a move, involving time and expense is unlikely to be undertaken if there wasn’t a basis, provided by the buyer, for the seller’s going forward.  It should be noted however, that even if the criteria of Section 2-201(3)(a) are satisfied, the seller will still have to prove his or her case, for the satisfaction of those criteria merely eliminates the barrier of the Statute of Frauds.  It does not result in a conclusive presumption that the seller is entitled to judgment.

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by learntheucc on November 20, 2011  •  Permalink
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Posted by learntheucc on November 20, 2011

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The Contract After the Agreement.

The recent sequence of Blogs began with one of the most fundamental, pervasive and important cornerstones of the Uniform Commercial Code: What is the contract between the parties? Our analysis began with section 1-201(b)(12) which states the basic definition of a “contract” under the Uniform Commercial Code:

“Contract”…means the total legal obligation that results from the parties agreement as determined by [the Uniform Commercial Code] as supplemented by any other applicable rules of law.  Section 1-201(b)(12)

The past three Blogs have focused on the first element: the parties agreement:  defined as:

…[T]he bargain of the parties in fact, as found in their language or inferred from other circumstances, including course of performance, course of dealing, or usage of trade as provided in Section 1-303.

The importance and potential impact ‘of  language, course of performance, and usage of trade’ have been demonstrated. Reported cases overwhelmingly support the importance of these concepts.  It must be remembered however, that these are listed as examples of ‘inferences from other circumstances’ are thus illustrative, not exclusive.  To the extent a favorable ‘inference’ can be made from ‘other circumstances’, the advocate has a vehicle to introduce evidence which can establish that result.

The basics of ‘agreement’ are now in place.  However, it is clear from a reading of Section 1-201(b)(12), that this is only one of three elements which must be looked at in determining what the ‘contract’ is:

The other two involve:

  1. The application of the laws of the Uniform Commercial Code to the ‘agreement’;
  2. Supplemental rules of law which may be applicable.

As will be seen in subsequent entries, both of the foregoing can have extraordinary and far reaching impact on what the end result of the ‘agreement’ is in reality.  The potential for favorable drafting of contracts, timely intermediate actions, and creative strategies for litigation will be interwoven into these discussions.

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by learntheucc on November 13, 2011  •  Permalink
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Posted by learntheucc on November 13, 2011

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“Course of Performance”: Impact on Contract

The “contract”, or “total legal obligation” between the parties, as defined in Section 1-201(b) (12) is comprised of three elements:

  1. The parties’ agreement;
  2.  The laws of the Uniform Commercial Code;
  3. Other applicable rules of law.

Each of these three variables can have an enormous impact on a sale of goods contract, and any other transaction which occurs under the Uniform Commercial Code.

      1.      The parties’ agreement;

Per section 1-201(b)(3) the parties’ agreement consists of five elements:

  1. Language;
  2. Course of Performance;
  3. Course of Dealing;
  4. Usage of Trade;
  5. Inference from Other Circumstances

Language within the purview of Section 1-201(b)(3) may be written or oral.  While there may be parol evidence issues, the “agreement” is being determined here.  Parol evidence and other laws may affect what the agreement is as a legal reality, but at this stage of the process we are considering all written language and any purported verbal discussions.

      2.      C ourse of Performance

Even if there is a written contract with terms clearly stated, the “course of performance” between parties to an agreement, can dramatically alter the ultimate meaning of the words used.

(a)   A “course of performance” is a sequence of conduct between the parties to a particular transaction that exists if:

(1)   the agreement of the parties with respect to the transaction involves repeated occasions for performance by a party; and

(2)   the other party, with knowledge of the nature of the performance and opportunity for objection to it, accepts performance or acquiesces in it without objection.

Patterns of behavior which exist under a “course of performance” may become part of the agreement.  Assume for a moment that Buyer and Seller had a contract whereby Seller was to deliver 40 car loads of tomatoes on the third day of each month.  Further assume that during the first two years of the contract, delivery was made on the 8th, and that Buyer never objected to that date.  Finally, assume that the price of tomatoes dropped by fifty per cent and Buyer purchased  40 carloads in the open market since the deal was “too good to pass on”.

When the forty carloads from the original Seller show up on the 8th, Buyer rejects the tender stating “they were not delivered in accordance with the terms of the contract. Delivery was due on the third”.

I believe that the “course of performance” between the parties for the two years in question, resulted in effectively changing the delivery date to the 8th of the month.

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by learntheucc on October 20, 2011  •  Permalink
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Posted by learntheucc on October 20, 2011

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Monopoly and the UCC

Monopoly and the UCC

There are millions of businesses and hundreds of millions Americans who are impacted by the Uniform Commercial Code every day.  Some of these entities interact with the UCC hundreds or thousands of times per day.  Regardless of the volume of transactions, if you are in business, you need to know the meaning and operations of the Uniform Commercial Code.

I have often analogized various aspects of life to a board game.  When playing a board game, it is very helpful, if not essential, to understand the rules of the game.  Moreover, the better one understands the rules of the game, the greater the likelihood of winning.  Take Monopoly for example.  People who understand the rules: which properties pay the most in rent; how to get a monopoly, and then how to build houses and hotels, are ready to play the game and ready to win.

If you compare the foregoing individual to someone who has no clue what the rules of Monopoly are, it is quickly apparent the latter has virtually no chance of winning.  The reason is simple: he doesn’t’ know what to do.  He knows to select a piece for the game, and how to roll the dice, but has no understanding of how to succeed.  He may be able to move around the board for a long time.  But eventually, he will lose.

The same is true in business.  You need to know the rules.  You need to understand the legal structure of the world you have entered, and particularly how to avoid a mistake that can cost you everything.  Like the uninformed Monopoly player, without sufficient understanding of the rules of the game, you may be able to move around the board, but the risks you take every day by being uninformed can cost you everything.

Nowhere is this more evident than in the Reply Doctrine of the Statute of Frauds contained in  Section 2-201(2).  The basic Statute of Frauds rule contained in Section 2-201(1) requires sales contracts with a value of $500 or more “must be signed by the party against whom enforcement is sought…”.  Assume for example, that Seller agrees to sell Buyer 1000 tables worth $500.00 per table.  That is a great deal for buyer and he is excited about the deal.  A week later, Seller meets Buyer #2 who offers seller $750.00 per table. Seller accepts and sells the tables to Buyer #2.  If Buyer #! Brings a cause of action against Seller and there is no written contract, Seller will prevail.

Section 2-201(2) can change that result in a very dramatic way.  Assume Seller and Buyer are discussing a sale of the tables for $500.00 per table, and the parties agree to the sale of the 1000 tables at that price.  Three days later, on October 1, 2011 Buyer writes Seller and states the following:  “Pursuant to our phone conversation on September 28, 2011, I hereby agree to buy 1000 tables from you for $350.00 per table.”   Seller reads the letter, tears it up and throws it away.  He doesn’t’ want to waste any more time dealing with this Buyer..

What Seller should have done is immediately write Buyer back and state that “there was no deal at $350.00 per table.  The deal was for $500.00.”  Seller’s failure to reply to Buyer’s “confirmation of the contract” within ten days, results in a waiver of the Statute of Frauds rule of 2-201(1).  Translation: Buyer can sue Seller for Seller’s alleged breach of contract to sell the tables at $350.00 per chair.  While Buyer would still have to prove his case, Seller would not be able to use the basic Statute of Frauds rule as a defense, and would face the costs of litigation, as well as the risk of losing.

Obviously, it is far better to answer  your mail in a timely manner in a situation such as this, and eliminate the possibility of the result faced by not taking timely and appropriate action.  This is an example of a single instance where not knowing the appropriate provisions of the UCC can result in a potential disaster. Conversely, understanding the law, and proceeding accordingly, will result in ultimate protection for your business.

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by learntheucc on October 9, 2011  •  Permalink
Posted in Article 1 - General Provisions, Article 2 - Sales transactions, Article 3 - Negotiable Instruments, Article 4 - Bank Deposits, Article 5 - Letters of Credit, Article 7 - Documents of Title, Article 9 - Secured Transactions, Learn the UCC, Twitter
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Posted by learntheucc on October 9, 2011

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Commitment to Learning

The decision to undertake the challenge of learning any major area, regardless of the discipline, is itself a major decision.  Success is predicated upon a lot of discipline and hard work.  A lot of time and energy is expended in pursuit of the highest knowledge possible.   Each of us must choose how to best improve our minds, which I consider critically important www.2ptpe.com.

Therefore, the initial question is:  What do I gain by learning this material?  Does the gain justify the commitment?  This is true regardless of the area under consideration.  For purposes of the Uniform Commercial Code, there are distinct groups with varying needs.

If for example, you are a law student, you absolutely, unequivocally, must know the UCC, in the first instance to graduate from law school, and in the second instance to pass the Bar Exam.  Whatever it takes, however much you need to study, you need this information.

One of the things that has not changed during my time in the legal community is the fact that there are so few UCC specialists in law firms.  By specialist, I mean someone who understands the totality of the Code, and who deals with the UCC as a designated specialty like other areas of the law,  Obviously, there are many highly intelligent and knowledgeable people who do a great job in a particular UCC area;  generally, however,  they do not move outside those boundaries.  An attorney who has reached a high level of understanding of the overall meaning and structure of the UCC—has created for him or herself a unique position of particular significance in today’s Society.

That attorney is in a position not only to provide quality service to clients impacted by the Code, but also to make certain that the facts of any situation are filtered through the whole UCC.  Second, this attorney is in a position to attract clients.  There are numerous critically important provisions that any business should know what they mean and how they apply.

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by learntheucc on October 1, 2011  •  Permalink
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Posted by learntheucc on October 1, 2011

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